Knight Frank Second Homes 2011

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Report includes comments by John Endacott on implications of Finance Act 2011 changes to Furnished Holiday Letting rules.

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Knight Frank Second Homes 2011

  1. 1. RESIDENTIALRESEARCH New-build second homes report 2011
  2. 2. 2011NEw-buILDSECoND HomESDemand for new-build secondhomes remains strong The demand for new-build second holiday season improves the chances of homes has bucked the trend of slowing achieving high levels of bookings. In this way, activity seen in the mainstream UK a second property has become an investment opportunity as well as just a luxury. housing market since the financial crisis hit in 2007. The demand for holiday lets has remained robust throughout the recession and its Gráinne Gilmore, Head of UK Residential aftermath, with a 70% uplift in bookings Research at Knight Frank, examines the for UK holiday lets in Devon and Cornwall in factors supporting this sector. the early months of this year compared to A desire for ‘staycations’, the search for 2010, signalling a healthy trade for the rest good investment returns by investors and of the year. the weaker pound have combined to boost demand for new-build second homes and holiday homes, especially in the most Spending by desirable areas of the UK (figure 1). domestic While housing transactions in the UK tourists is mainstream market have slumped since 2007, the number of second homes continued expected to riseFigure 1 to rise steadily in 2008 and 2009. by 2.6% a year inSecond home hotspotsNeighbourhoods with the highest % of second In the popular second home destinations of the South West, the growth in second homes real terms overhomes (See chart page 5) continued in 2010, taking the number of the next decade holiday properties to new record highs in that region. The current low-interest rate environment is This growth is due to a combination of factors, also boosting investment interest in rental not least of which is the increasing desire for property. Property prices in many areas of ‘staycations’ in the UK. Spending by domestic the UK have yet to regain the heights seen tourists is expected to rise by 2.6% a year when the market peaked in 2007, which has in real terms over the next decade, while helped boost rental yields. In contrast to the spending by overseas visitors is tipped to minimal interest paid on savings accounts, climb by 4.4% a year. gross yields of between 6% and 7.5% achieved on some properties in the South West are Britons are seeking out holiday destinations pulling in investors. which involve less travelling, cutting down on expense as well as pollution. But they look The interest from prospective second-homers for resorts that can match the amenities and and investors has been further piqued by attractions on offer in some overseas holiday the weak pound, which not only makes the spots. This is one of the main reasons why UK prospect of holidaying abroad less appealing coastal resorts are so popular, especially in but reduces the attraction of buying a property the South West, where a wide variety of water overseas. Demand in the UK is benefitting activities are available – from surfing to sailing. from increased activity among those who Around half of the top 30 second home traditionally would have bought a home hotspots are based in the South West, and the in Spain or France. A slight easing in the region dominates the domestic tourism market mortgage market over the past 12 months – accounting for more than one in every five has also helped boost trade. trips taken by UK holidaymakers last year. We Finally, while the tax regime for furnished examine the prospects for this region more holiday lets has been overhauled in the fully on pages 4-5 and 6-7. last year, there are still favourable tax breaks The prospect of a second home which can be on offer for investors or those buying a rented out when not in use is also an attractive second home to let out, as explained on theSource: Knight Frank Residential Research, DCLG one, and, as explained on page 3, the longer opposite page.2
  3. 3. KnightFrank.comhome economicsDemand for holiday lets remained income. Stonerush Lakes, a development of Because these properties are usually boughtstrong last year, with more than 39 holiday lodges by Charteroak Estates in Lanreath under lease or licence, a specialist mortgagemillion nights spent in UK self-catering in Cornwall, offers investors a guaranteed net is required. But lodges are typically moreaccommodation, underlining that the yield of 6% for two years, as well as the use of affordable than apartments or houses, whichstrong rise in 2009 was not a flash in the their lodge during a number of weeks of the year. can boost returns.pan and that the staycation trend hassome way to run.Official figures show that visits to Europe by UK Taxing issuesholidaymakers were down 4% in the year to April There are several tax breaks on offer for John Endacott, tax partner at Winter Rule, thecompared to the previous 12 months. owners of furnished holiday properties holiday lettings tax specialists, said: “TheDemand for self-catering accommodation which are available to rent. new regulation is likely to prove a minimalhas risen by more than 20% since before the barrier for existing landlords looking tofinancial crisis. The spend on self-catering When the property is sold, the rate of capital extend their portfolio of existing propertiesflats and houses in England also rose by 5% gains tax (CGT) charged on any rise in the as they will be able to claim back losseslast year to £1.7 billion, according to data from value of the property is less than half the made on refurbishing a new property againstVisitEngland. This trend is expected to continue, usual 28% rate at just 10%, as holiday letswith Deloitte and Oxford economics forecasting the money made from other properties. fall under the Entrepreneurs’ Relief rules.that spending by Britons holidaying at home will “But the new rules are likely to mean thatrise by a cumulative 30% by 2020. In addition, in some circumstances, the landlords are less inclined to invest heavily proceeds of the sale may be eligible forThe boost in spending on self-catering in refurbishing a property when they buy, ‘Business Asset Roll-Over Relief’, whichaccommodation partly reflects the longer holiday especially if it is their first holiday let. In allows landlords who reinvest the saleseason which is making it easier for landlords to some respects, this is only a continuation ofrent out their properties the whole way through proceeds into certain other assets to defer a trend that has been prevalent for severalthe year. payment of CGT until the new assets are sold. years, given the scarcity of credit availableThe summer season, which used to mirror the But it is also worth remembering that holiday for mortgages and renovation since theschool holidays, has become much longer as homes or other properties which come with financial crisis.”more people choose to take their holiday in June a time-limit on occupancy are treated as aor September instead of the traditional peak The second change, which will come into business for tax purposes, so VAT is payablemonths of July or August. force next April, lengthens the time a when the property is purchased, although property must be let out for it to qualify asAs well as high levels of bookings at Easter, some lodges are excluded from this. Annual a furnished holiday let.the rising popularity of short breaks – long business rates are also paid instead ofweekends or mid-week breaks, have effectively council tax. At present, landlords must make theextended the season to the whole year for the property available to let for 20 weeks a year, Owners of properties classed as a furnishedmost popular locations. and achieve at least 10 weeks’ occupancy holiday let can also claim up-front tax reliefAs a result, landlords are finding rewarding each year, with each let being no longer on the cost of furnishing a property. Butyields. With the best properties commanding than 31 days. the threshold for reliefs on this spending,strong rates during the summer season, yields in currently £100,000, will fall to £25,000 from From April next year, they will be required tothe South West average between 6% and 7.5%. April next year. make the property available for 30 weeks aBut some high-end developments can garner year, and achieve 15 weeks’ occupancy.even more. One-bedroom apartments at the There have been some major changes toOcean Gate development in Newquay, which the tax treatment of furnished holiday let A failure to do this means that the propertyhave an average asking price of £175,000, can properties recently after consultations will not be treated as a furnished holidaygarner an 8.8% yield with good occupancy rates, which have been rumbling on for more than let for tax purposes, instead falling into thewhile a three-bedroom house in the Talland two years. category of a residential property let.Bay development in South Cornwall, where New rules came into force in April this year While this is unlikely to impact on holidayproperties have been selling for £330,000, candeliver a gross yield of 8.2%. However the cost of meaning landlords can no longer offset lets in popular holiday locations with longfrequent ‘change-overs’ as well as maintenance losses made on holiday lets against their letting seasons, the concern is that it makescan add up, and those who opt to use a lettings other income. life more difficult for peripheral locations inmanagement company can be charged as much the UK where the season is shorter. Instead, losses incurred can only be offsetas 25% of rental income. Even so, the net yield against income made from other holiday There is still scope for tax perks on holidayafter paying the charge would still average just lets or otherwise carried forward and offset let properties but potential purchasers needover 5%. against future income made from the to carefully consider the implications of theAnother alternative for buyers is to invest in a holiday let. rule changes.managed property let which offers a guaranteed 3
  4. 4. 2011NEw-buILDSECoND HomESdevelopment and planning insight The South West of England is the most One route for developers seeking to build popular domestic tourist destination in new properties is to re-use an existing the UK, accounting for a fifth of every site. Several coastal hotels have been ‘staycation’ last year. re-developed as high-end apartments. In some cases, the hotel is re-vamped, and Many coastal resorts in the South West are run as a smaller operation alongside the favoured destinations because of their new apartments, which come with access to unique attributes. For instance Newquay in the hotel. Cornwall offers some of the best surfing in the country, while up the road in Padstow, At the Whitsand Bay hotel in Portwrinkle the wide range of restaurants and cafes in South Cornwall, Galleon Homes Ltd is opened by chef Rick Stein are a major draw. building 23 two, three and five-bedroom houses in the hotel grounds which will have But there is also growing interest in more full access to the hotel’s amenities including secluded spots, with the beaches of Talland the swimming pool and health club. Bay and Portwrinkle in South Cornwall becoming more popular with holidaymakers If developers cannot access traditional sites seeking a quieter atmosphere. in or near coastal resorts, another option is to move inland to former industrial sites 39.06m such as quarries and gravel pits. These have the added bonus of offering the possibility of a lake, creating a water-side location. The highly successful Cotswold water park is an example of how this approach can work. Number of nights spent in self-catering accommodation in the UK in 2010 Alternatively developers can use existing caravan park or chalet sites to build holiday lodges. These buildings are not classed Second home developments traditionally as fully permanent structures for planning do well in areas which already have a purposes but developers fit them out to very high proportion of second home owners as high standards, making them a better value new, high-spec apartments tempt existing option for buying a luxury second property. owners of houses to trade-in (figure 3). But Lodges are typically less expensive to buy there are also opportunities in some moreFigure 2 than traditional homes as they are sold on a remote areas, especially on sites which haveSecond home ownership in England long lease or under licence. already been used for caravans, or on old7% growth industrial sites. Planning rules often stipulate that holiday lodges, and in some cases other types of Building work on new developments, which development, can be occupied all year ground to a halt during the financial crisis, is round by anyone, but the planner imposes 2010: 246,026 starting again in the South West, delivering a a maximum monthly time-limit that any ‘one fixed supply of new property which is helping person’ can stay, usually a maximum of six support prices. or eight months. The argument is that this Prices for new-build properties are still strong protects the local economy as visitors in the most popular areas such as Rock, spend more than those who live in the Polzeath and Watergate Bay, while the wider region permanently. 2004: 228,896 market has remained broadly stable. However these rules make it trickier for Prices for new properties in the South West potential buyers to raise finance as any slipped by 2% in the year to March, but are property with such restrictions is classed still 5% higher than in early 2009, according as a business asset. Lenders will not offer to data from Nationwide. Over the last 10 a traditional mortgage and buyers must years, new-build property prices have risen instead choose from only a handful ofSource: Knight Frank Residential Research, DCLG by 75%. specialist home loans. Buyers are also liable4
  5. 5. KnightFrank.comto pay 20% VAT when buying such a holidayhome, and while many developers roll thisinto the price of a property, others choose to Ask the Plannermarket their property at sale price plus VAT. David Lobban, Director of PCL Planning and Environmental Consultancy, ExeterSome developers are lobbying local authorities How is the government’s localism agenda under the proviso that residents could notto remove holiday restrictions, and in some affecting planning decisions in the live there all year round – putting an 8, 10 orcases have been granted permission to build South West? even 11-month limit for the amount of time onepermanent homes, with the necessary quota As is the case all over the UK, local authorities individual could stay. This was an awkward are in ‘wait and see’ mode. The details of rule, and many authorities have moved to aof affordable houses and amenities that are the localism bill, especially the parts dealing new form of restriction – that the propertyrequired in all new-build developments. with planning, have yet to be set in stone. cannot be the resident’s sole or primary But in the meantime, the signs are that local residence, which is no barrier to second-homethere is growing authorities will deal with their increased powers quite differently. In some areas, such buyers or those investing in a holiday let looking for annual returns on their investmentinterest in as Plymouth, the strategy for a sharp growth from rental income. But it does throw up the in housing looks to be pushing ahead, whilemore secluded Exeter recently cut its planned new housing issue of VAT payments, which is another hurdle for developers to navigate.spots, with target from 15,000 to 12,000 by 2026. Is there an alternative? What is the attitude to second homes?the beaches of It is a fine balancing act. Local authorities are In some cases, especially in urban areas, developers are working with localTalland bay and very aware that the tourist industry is a major part of the economy and the largest employer authorities to draw up plans for amenities that would be required under a typicalPortwrinkle in in the South West. But they are also trying to residential development, such as additional balance the needs of local communities. ThisSouth Cornwall is not an easy task. infrastructure and affordable houses. As a result, the developments are being built withbecoming more How are they trying to address this issue? no restrictions, and buyers can also use thepopular with In recent years local authorities have granted planning for second-home developments property as their primary residence should they wish.holidaymakersseeking a quieter Top 30 neighbourhoods for second homesatmosphere Key village/town Local authority % of second homes 1. Leysdown-on-Sea, Isle of Sheppey Swale 64.8A real growth area over the next year or two will 2. Hemsby Great Yarmouth 57.1be developments which offer larger properties, 3. Trebetherick/Polzeath North Cornwall 48.6as the rising trend of ‘generational’ holidays, 4. Scratby Great Yarmouth 45.6with three generations of family holidaying 5. Salcombe South Hams 42.0 6. Brancaster King’s Lynn and West Norfolk 40.7together, have boosted demand for more 7. Padstow North Cornwall 38.0spacious apartments and houses. One agent 8. Sandbanks Poole 35.3said it was not unusual for families to organise 9. Aldeburgh Suffolk Coastal 35.2a holiday with both sets of grandparents 10. Rock North Cornwall 34.1 11. Beadnell Berwick-upon-Tweed 33.0taking it in turns to visit. 12. Southwold Waveney 32.9 13. Constantine/St Merryn North Cornwall 32.9Sales of older, larger homes are already 14. Selsey Chichester 32.4benefitting, although the interiors must be 15. Seaview, Isle of Wight Isle of Wight 32.3modern. As the agent said, ‘draughty cottages 16. Burnham Market King’s Lynn and West Norfolk 31.6just won’t cut it any more.’ However beautifully 17. Winterton-on-sea Great Yarmouth 31.5 18. East Rother, East Sussex Rother 30.9finished new properties with three or more 19. St Osyth, Essex Tendring 30.4bedrooms will command the highest premiums. 20. Rame Peninsula Caradon 30.4 21. Norton, Isle of Wight Isle of Wight 29.8One of the key routes to maximise rental yields 22. Durlston Bay, Swanage Purbeck 28.9for holiday homes is to offer flexible lettings 23. East Wittering, West Sussex Chichester 28.6arrangements, especially outside the peak 24. St Mawes/Portscatho Carrick 28.5 25. Inner/Outer Hope & Malborough South Hams 28.3season. Long weekends or mid-week breaks 26. Southbourne Bournemouth 27.5have become increasingly popular, especially 27. Brompton Kensington and Chelsea 26.9as visitors can fly into Plymouth, Exeter or 28. Hunstanton King’s Lynn and West Norfolk 26.8Newquay. Alternatively the train from London 29. Dartmouth (estuary shore) South Hams 26.7 30. Thurlestone South Hams 26.2to Exeter can take as little as two hours. Data is for all properties on which council tax is payable including chalets 5
  6. 6. 2011NEw-buILDSECoND HomESnew developments Figure 3 Second home heat map – South West England % of second homes 0-2 1 2 3-5 6-10 11-20 Over 20 Source: Knight Frank Residential Research, DCLG 6holiday lodges CoASTAL APARTmENTS 2 1Stonerush Lakes, Lanreath, Ocean Gate, Newquay, CornwallSouth Cornwall 3 2-bedroom apartments2 or 3-bedroom lodge from £220,000£175,000-£185,000 3-bedroom penthouse apartmentThis newly launched development of 70sustainably built holiday lodges by Charteroak £595,000Estates, which is due for completion in 2013, ison the site of an old fishing holiday retreat This development, which is nearing 3which had caravan and camping pitches. Six completion, has made the most of the views inlodges have already been sold from the first the already popular Pentire area which is aphase of development. mecca for holidaymakers and locals alike. The main reason for this is Fistral Bay, perhapsThe site, which is situated inland, with the one of the most popular and famous surfinglodges surrounding a stocked fishing lake, is beaches in Cornwall. Each apartment comesjust 15 minutes’ drive from the coastal town of with access to the communal roof terraceFowey, which sits in the Fowey Estuary. which overlooks the beach and the ocean.Fowey is a popular destination for sailors, coastal houses The development will be attractive to surferswith the local yacht club welcoming visiting Rocky Lane, St Agnes, Cornwall of all levels, as those who are inexperiencedyachtsmen and also boasts many other can visit one of the several surf schoolsattractions such as coastal walks, horse-riding, day cruises and canoeing. The lodges based just minutes from the apartments £300,000-£595,000 along the shore.are also situated within 10 miles of the These very contemporary three-bedroompopular Eden Project near St Austell. Golfers will also be enthused by the location holiday homes are set in a hillside woodland as the site sits on the edge of the Newquay setting around 400 metres from TrevaunanceThe lodges are perfect for investors, as they links golf course. Ten of the 26 apartments Cove. The sandy beach sweeps down to thecome with the option for rental with aguaranteed yield of 6% for the first two have already been sold in the few weeks Atlantic swells that make the sea perfectyears. Buyers who choose this option can since the development was launched. for surfing.use the lodge for several weeks a year, A two-bedroom sea-facing apartment in St Agnes is a popular Cornish seaside village,although use during the high season is this complex is expected to command £1,000 and a vibrant location with many shopslikely to be restricted. a week in rent during the high season. specialising in selling local produce.Those who prefer to use the property can still Newquay town centre is a 15-minute walk With holiday bookings for this summer up bybenefit from a ‘lock and leave’ option as they away, or a 30 to 40-minute walk along the 100% in some North Cornwall locations, thesecan rent it out for the rest of the year through stunning coastal path. In the opposite houses should make an ideal investment asCharteroak Estates who will manage all direction is the coastal walk along the well as a welcome retreat from the hustle andchangeovers and rental bookings in return Pentire headland, with access to the highly bustle of normal life. The first phase of thefor 25% agent letting fee. rated Lewinnick Lodge restaurant. development has already sold out.6
  7. 7. KnightFrank.com5 5 6 larger coastal houses coastal houses Long Beach, Woolacombe, Devon Pinewood, Polzeath, Cornwall £620,000-£720,000 4-bedroom house £950,000 4 Reflecting the demand for hi-spec larger houses, this development of two 4-bedroom With one of the most coveted addresses in beach houses alongside a three-bedroom Cornwall, the one, four and five-bedroom property, is on an enviable site with views of houses are designed to appeal to the holiday Woolacombe Bay. market. They are light and airy, with most laid While two of the houses by London developer out over three storeys, perfect for extended 4 families to stay in. Each house also comes Lyndon Living have holiday restrictions, one of the four-bedroom houses on the end of the with underground car-parking and storage. terrace development is also available for full Polzeath is one of the most popular coastal residential use. towns on the North Cornwall coast and the The three-mile long Woolacombe beach, houses are a short walk away from three which lies between Baggy Point and Morte beaches, including Daymar Bay, a popular Point, has been voted one of the best in spot for families and surfers. The St Enodoc Britain, and is popular with surfers and golf course is just 15 minutes away, while the swimmers alike. The lively town of coastal walks offer stunning views. Those re-developed hotel Woolacombe is a popular destination on the keen to visit Padstow can travel by ferry from At the Beach, South Hams, Devon North Devon coast, and links nicely with the nearby town of Rock. Croyde, another renowned surfing sea-side 2-bedroom apartment resort in that area. The development is around The five houses situated towards the front of £295,000 ten miles from the market town of Barnstaple. the development are expected to command The four-bedroom house is expected to rents of £2,250 a week in the peak summer 2-bedroom house attract weekly rents of £1,500 in high season. season, and £1,300 off-season. £310,000 Figure 4 Number of second homes in the South West A hotel in a superb coastal location has been 53,000 completely re-developed into 15 apartments 52,500 with one, two, three and four bedrooms. Three cottages have also been built in the 52,000 hotel grounds. The development is based in 51,500 the popular area of South Hams, where the coastline makes up most of the South Devon 51,000 Area of Outstanding Natural Beauty. 50,500 Six of the apartments and three of the 50,000 cottages are still to be sold. 49,500 A two-bedroom apartment could be let out 49,000 for between £700 in low season and £1,100 2004 2005 2006 2007 2008 2009 2010 in high season per week. Source: Knight Frank Residential Research, DCLG 7
  8. 8. RESIDENTIALRESEARCHRecent market-leading Residential Research Residential Developmentresearch publications Liam Bailey Miles Kevin Head of Residential Research T 01392 848844 T 020 7861 5133 miles.kevin@knightfrank.com liam.bailey@knightfrank.com Stephan Miles-Brown Gráinne Gilmore T 020 7861 5403 Head of UK Residential Research stephan.miles-brown@knightfrank.com T 020 7861 5102 Justin Gaze grainne.gilmore@knightfrank.com T 020 7861 5402 justin.gaze@knightfrank.comHousebuilding Super-prime London David Fenton2011 Report 2011 T 01789 269 853 david.fenton@knightfrank.comThe Wealth Report The London Review2011 Spring 2011Retirement Housing Student Property Knight Frank Residential Research provides strategic advice, consultancy servicesReport 2010 2011 and forecasting to a wide range of clients worldwide including developers, investors,Knight Frank Research Reports are available at funding organisations, corporate institutions and the public sector. All our clientswww.KnightFrank.com/Research recognise the need for expert independent advice customised to their specific needs. © Knight Frank LLP 2011 This report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by Knight Frank LLP for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank LLP in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of Knight Frank to the form and content within which it appears. Knight Frank LLP is a limited liability partnership registered in England and Wales with registered number OC305934. This is a corporate body that has “members” not “partners”. Our registered office is at 55 Baker Street London, W1U 8AN where a list of members may be inspected. Any representative of Knight Frank LLP described as “partner” is either a member or an employee of Knight Frank LLP and is not a partner in a partnership. The term “partner” is used because it is an accepted way of referring to senior professionals.

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